Are we really back to “bubble” prices?

We’re back at the peak of the market. Well, that’s what some of the national indexes are saying. So imagine yourself in line at Starbucks and someone remarks, “I heard on CNN we are back to bubble prices.” What would you say? Let’s look at some of the “national” trends below and then kick around a few thoughts. I’d love to hear your take in the comments.

Case-Shiller National Index: This index shows the “national” market is about where it was during the peak of the index in 2006 (source).

Freddie Mac National Price Index: This index shows the “national” market is about where it was during the peak of the index in 2007 (source).

Freddie Mac California Price Index: The “national” index in gray shows we are back to the peak of the market, but the state index in black shows California is still about 5% below the peak (source).

Freddie Mac Sacramento Price Index: The national index in gray shows we are back to the peak, but the local Sacramento index in black shows we are still a ways off (source).

Some quick thoughts:

1) I want to buy in the national market: There is no such thing as a national market, which makes “national” indexes only so valuable (or sometimes totally useless). As Jonathan Miller says, real estate is local and we have thousands of local markets instead of one national market. Therefore we ought to be naturally cautious about national metrics (see Barry Ritholtz rip NAR’s affordability index). In short, I watch “national” indexes, but I look to the local market for the real trend.

2) Different Peak: The “national” market peaked around 2007 depending on which index you’re looking at, but Sacramento peaked in 2005. Media outlets often talk about the housing “bubble” bursting in 2007 when in fact that wasn’t true for many markets (including Sac).

3) Current Values: Many Sacramento neighborhoods are still a good 10-15%+ below the peak of the market, though some classic areas are getting very close (while other depressed areas have much further to go). I included some neighborhood graphs below for reference.

4) Condos & Land: Let’s remember not all property types trend the same way. For instance, the condo market has struggled since the housing “bubble” burst. Owner occupancy rates being too low have stalled many complexes from obtaining financing, which has stalled value increases too. Vacant land is also far below where it was at the peak because there is less new construction today and we don’t have land speculators like we did 10+ years ago.

Specific Neighborhoods (Are we there yet?):

I hope this was helpful.

Questions: Are there any national metrics you pay attention to? Any you’d recommend avoiding? Did I miss something? I’d love to hear your take.

Thank you Jeff. I appreciate that. It is definitely a different market right now. I agree. We always have to ask what is driving the market. I like your use of the word “immigration” (as well as “refugee” in that Inman article).

Great post Ryan. In Portland, OR, we are now about 12% above our peak in 2007 (ours did happen in 2007). http://us.spindices.com/indices/real-estate/sp-corelogic-case-shiller-portland-home-price-nsa-index It is fun to take Case-Shiller index data and place a strait line on the graph going back to the beginning. When you do that, you will see how the last bubble extended well above the typical increase of values, the decline dropped well below, and now we are back above where historical trends should put us. From that prospective only, it looks like we are in another bubble. However, only time will tell. The growth in our local economy and population tend to be supportive of the growth that we are seeing now and there does not seem to be shaky lending that was present in the last bubble. My fingers are crossed for market stabilization rather than a bubble bursting.

Thanks Gary. I respect how in tune you are with your market. Kudos to you. Other than typical housing metrics I think we can probably track the Portland economy by the number of breweries too. 🙂 I hear the scene has really exploded (as it has here, though we are still behind you guys). You are right that we don’t have the ticking time-bomb of adjustable rate mortgages.

Hey, let’s be sure to connect soon when I head up your way. I’ll be sure to email you.

Great post Ryan, and thanks for reminding everyone about local markets. I think NAR likes to push national numbers because it makes the overall market look good. The only problem with that is when sellers see this they may think that they can price their home higher than the local market might support. This can cause problems with appraisals coming in lower than contracts. Right now the Birmingham market is just a little higher than its peak in mid 2007. Your brewery comment to Gary was funny because we too have had explosion of breweries in our area and they have been in urban areas that are experiencing regrowth and increases in home prices. Maybe we need to do a post on home values next to breweries compared to those further away. That would be interesting, huh?

Well said, Tom. Thank you. With political ads we need to consider who is making or paying for the ad. The same holds true with organizations putting out data. This means we also have to know enough about the numbers that we can sniff out real trends from the fake ones. I would love to see data on home prices and breweries.

Yes, we are back to 2005 prices in Tampa Bay. It’s scary. Too much money chasing too little inventory. This time it’s not the lose lending standards. I think it’s the investors. They don’t always buy cash so it’s hard to tell by looking at the stats but I do PM so I know they out there.

Interesting to hear Jana. Thanks so much for sharing. You are so right that investors don’t always buy cash. Financing is so cheap these days that some certainly use financing, but that makes it more difficult to track just how many investors are in the market. I know in my market only 15% or so of sales have been cash lately. I imagine the percentage of investors playing the market is higher than 15%, though we certainly don’t have anywhere near the same number as in 2012 / 2013 when cash was about 36% of all sales (these were dubbed The Blackstone years).

Keep me posted. I’ll be very curious to see how trends unfold in your market. Thanks again.

If you’ve ever take a Steve Smith or Patrick Egger course…. one of my greatest lessons to learn was watching demographics and median incomes….. there is usually a visible relationship between population changes, median incomes, and overall home values. There is a historic relationship between healthy market increases and ‘bubble’ pricing.

That historical reference of 1/3 of income for housing has typically been a healthy spot. Not a one size fits all.. but a healthy spot…. So where do median incomes fall in relation to median prices? I think you have some leeway on either side… but if housing is costing 40+% of overall income, then I would say, its pobably bubble pricing. I would venture to say anything over 35%; but thats just me….

Thanks Ralph. I always appreciate your take. Both Steve & Patrick are incredibly sharp guys too. Income is a huge part of a market’s growth and we really haven’t seen a market that has been driven by wage growth or the local economy. Low interest rates have compensated for less job growth. Hopefully we’ll see some more positive economic growth in the future. I like to think of a market like a multi-layered cake. There is one cake but there are many layers that impact value. Income is certainly one of the layers of the cake.

Hello, I am looking to buy a house in Midtown Sacramento. I am wondering if I should wait to see if prices will drop or should I buy now before they go up? I have noticed the few houses I have looked at have dropped in price once already.

Hi Jennifer. Thanks for reaching out. When prices are dropping, it could be a trend in the market or it could be the season. I have definitely noticed some overpriced listings in many areas of Sacramento. Sellers are very much out of tune with buyers these days, so buyers are simply not biting on overpriced listings in most cases. This doesn’t mean values are not inflated from low interest rates and other factors, but it does mean some listings are going to sit for a long time until the pricing becomes realistic.

Should you buy or wait? This is actually a difficult question because nobody (including me) knows what the future holds in terms of real estate. Just as political pundits couldn’t predict the presidency last week, I really cannot predict exactly what real estate market will do. Why? I don’t have a crystal ball and the market is complex and driven by so many factors that are both inside and outside our area. I will say the market is in a place where it needs to be more driven by the economy and wage growth instead of low interest rates. We have seen very hefty increases since 2012 and the momentum of value increases has slowed this year. This means the market is becoming less affordable and there is less room to see values increase unless the economy and wage growth start to become more significant drivers. The reality is markets go up and down all the time though. Even if the market was to go down in the future, nobody can predict if it would utterly crash or simply correct by a modest amount. One important aspect to remember is we don’t have the ticking time bomb of adjustable rate mortgages right now like we did 10 years ago (which helped cause a HUGE crash). This doesn’t mean values cannot decline in the future, but it does remind us we have a different market today than we did 10 years ago.

I think you’re going to get a different answer to this question depending on who you talk to. One of the things I always consider is the mortgage payment and timing of purchase. That’s really what it comes down to in my book. Does the price and neighborhood make sense for your wallet? Markets go up and down all the time. If you buy this house are you comfortable with the mortgage payment? Moreover, if the market did decline, what house or neighborhood would you want to ride down the decline in?

Very few people buy at the low point of the market. In fact, I always make it a point to ask one question to an owner when I see he/she bought in early 2012 or very late 2011. I ask, “Did you know you bought at the bottom of the market?” About 90%+ of the time the answer is, “I had no idea. I just got lucky.” This is because people tend to buy when it makes sense for their wallet rather than buying at the absolute best time for equity building. I don’t say this to sway you either way, but only to offer insight.

In short, this is only a question you can answer for yourself because it is a personal decision while not knowing what the future holds. I would watch those listings carefully though so you can maybe discern if they are simply overpriced or if the market is doing something else.

In addition to Ryan’s point about affordability of a monthly mortgage…. understand that you are now the landlord. If anything goes wrong, its up to you to have money put aside to pay for those repairs.

On top of that, maybe all utilities werent a cost factor in renting. When I was appraising in the Sacramento market, I came across a lot of owners who paid the water/sewer and/or garbage and either factored it into the rent price, or factored only a portion…

Then there’s the added cost of escrow to your principal and interest. Are you including property tax, and home owners insurance into an escrow account that will be added to the monthly payment? Are you financing through FHA which requires life of the loan PMI? or are you using conventional financing.

Im not trying to dissuade you from buying, but make sure the payment is realistically affordable and will allow you enough wiggle room to save some money to cover expenses, versus being cash strapped because your house payment is too large. Even a large item issue that insurance covers, usually requires you to pay the deductable. You really want to be at a point where you can put away about 3 mortgage payments away, in case something happens.

Thanks Ralph. I always appreciate your take and I think it’s so important to weigh our finances. It’s easy to get distracted by the bright shiny object of home ownership (or whatever we’re buying) without really crunching the numbers and being objective about affordability. Just the other day I almost upgraded every single phone in the family because we were adding another line (teenage son). I’m so glad I did my homework even though it took hours to weight all the options. We actually decided to stay with my current carrier and essentially saved hundreds of dollars on the spot and our bill ended up being less than what it would have been had I switched. Dodged a financial bullet. 🙂 Anyway, there are so many expenses with home ownership. Sigh.

As an FYI, with rents increasing right now in Sacramento I have found some landlords able to put water and some of the typical landlord expenses on the tenant (because they can).

RE ties you down. It is oft an expense not an investment. Buy if you know you are going to live there for the next 30 years. Live close to work which will save commute cost and time spent. Don”t think a home as an investment.

Ralph Valencia made a good point that housing cost needs to be at 1/3 of income. I am a PM and that’s my qualifying standard. The median income in Tampa is $51,000 and the median home prices are $203,000. The question is about the accuracy of the median income.
What I see in my practice is resistance to higher rents.

Thanks so much Jana. Affordability is a big deal and we really need to see wage growth become a bigger driver in our market. On a related note it’s going to be interesting to see what happens with Dodd-Frank in coming time under a Trump presidency. If lending guidelines are loosened, that could certainly impact prices. Buyers are able to “afford” higher prices when financing gets a little more creative….

It seems like most sources are projecting a 5% increase in value. That is fairly modest when considering the past 4 years. Moreover, if that increase occurs over the first 6 or so months of the year, that is still fairly modest. If the increase happened to be fluid and happen each month, that would be less than 0.5% increase in value per month.

It’ll be interesting to see what happens in the Bay. We do have Bay Area buyers here for sure. What aspects of our real estate do you think are dependent on Bay Area real estate? Sales volume, inventory, prices??

My personal belief and I have not done the homework to back it up — both prices and volumes are dependent on the Bay Area. If prices in the Sacramento area drop significantly, then private equity will jump in, but by then volumes will be very low because there won’t be much in terms of move-up buying.

Thanks Anoop. I appreciate hearing your take. Please pitch in your thoughts any time. Now that you have a comment approved too, you can post any time without moderation (I get so many spam comments, so I have to do that).

Let’s watch the Bay Area very closely and see what happens this year. As an aside, I read the latest Yardi Matrix report this morning and I see they have Sacramento multifamily rents projected at a 9.6% increase (down from 10.1% last year) while San Fransisco is projected at a 6.5% increase (down from 2.3% last year).

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